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4/27/2015
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10-1 Copyright © 2012 Pearson Education, Inc.
Publishing as Prentice Hall
i t ’s good and
good for you
Chapter Ten
Pricing:
Understanding and Capturing Customer Value
10-2 Copyright © 2012 Pearson Education, Inc.
Publishing as Prentice Hall
Price is the amount of money charged for a product or service. It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service.
It is the only element in the marketing mix that produces revenue; all other elements represent costs i.e Product, Place and promotion.
What is a Price?
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10-3 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value
Customer Value-Based Pricing
10-4 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Customer Value-Based Pricing
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10-5 Copyright © 2012 Pearson Education, Inc.
Publishing as Prentice Hall
Major Pricing Strategies
Value-based pricing uses the buyers’ perceptions of value, not the sellers cost, as the key to pricing. Price is considered before the marketing program is set.
• Value-based pricing is customer driven
• Cost-based pricing is product driven
Customer Value-Based Pricing
10-6 Copyright © 2012 Pearson Education, Inc.
Publishing as Prentice Hall
Major Pricing Strategies
Customer Value-Based Pricing
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10-7 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Good-value pricing
offers the right combination of quality and good service at a fair price
Existing brands are being redesigned to offer more quality for a given price or the same
quality for less price
Customer Value-Based Pricing
10-8 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Everyday low pricing (EDLP) charging a constant everyday low price with few or no temporary price discounts
High-low pricing charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items
Customer Value-Based Pricing
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10-9 Copyright © 2012 Pearson Education, Inc.
Publishing as Prentice Hall
Major Pricing Strategies
Value-added pricing attaches value-added
features and services to differentiate offers,
support higher prices, and build pricing power
Pricing power is the ability to escape price
competition and to justify higher prices and
margins without losing market share
Customer Value-Based Pricing
10-10 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Cost-based pricing setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk.
It adds a standard markup to the cost of the product
Cost-Based Pricing
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10-11 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Fixed costs
Variable costs
Total costs
Cost-Based Pricing
Types of costs
10-12 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Fixed costs are the costs that do not vary with production or sales level
– Rent
– Interest
– Executive salaries
Cost-Based Pricing
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10-13 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Variable costs are the costs that vary with the level of production
– Packaging (paper sheet)
– Raw materials
Cost-Based Pricing
10-14 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Total costs are the sum of the fixed and variable costs for any given level of production
Average cost is the cost associated with a given level of output
Cost-Based Pricing
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10-15 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Experience or learning curve is when average cost falls as production increases because fixed costs are spread over more units
Costs as a Function of Production Experience
10-16 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
• Cost-plus pricing adds a standard markup to the cost of the product
• Define: Cost plus pricing is a cost-based method for setting the prices of goods and services. Under this approach, you add together the direct material cost, direct labor cost, and general costs for a product, and add to it a markup percentage (to create a profit margin) in order to derive the price of the product.
• Benefits – Sellers are certain about costs
– Prices are similar in industry and price competition is minimized
– Buyers feel it is fair
• Disadvantages
– Ignores demand and competitor prices( i.e. no competition in market)
Cost-Plus Pricing
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10-17 Copyright © 2012 Pearson Education, Inc.
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Major Pricing Strategies
Break-even pricing is the price at which total costs are equal to total revenue and there is no profit
Target profit pricing is the price at which the firm will break even or make the profit it’s seeking
Break-Even Analysis and Target Profit Pricing
10-18 Copyright © 2012 Pearson Education, Inc.
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Other Internal and External
Considerations Affecting Price Decisions
• Before setting prices, the marketer must understand the relationship between price and demand for its products
The Market and Demand
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10-19 Copyright © 2012 Pearson Education, Inc.
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Other Internal and External Consideration Affecting Price
Decisions
Pure competition
Monopolistic competition (imperfect competition)
Oligopolistic competition(oligopoly is much like a monopoly, there are at least two firms
controlling the market)
Pure monopoly
Competition
10-20 Copyright © 2012 Pearson Education, Inc.
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Other Internal and External Considerations Affecting Price
Decisions
The demand curve shows the number of units the market will buy in a given period at different prices
• Normally, demand and price are inversely related
• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality
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10-21 Copyright © 2012 Pearson Education, Inc.
Publishing as Prentice Hall
Other Internal and External Considerations Affecting Price
Decisions
10-22 Copyright © 2012 Pearson Education, Inc.
Publishing as Prentice Hall
Other Internal and External Considerations
Affecting Price Decisions
Price elasticity of demand illustrates the response of demand to a change in price
Inelastic demand occurs when demand hardly changes when there is a small change in price
Elastic demand occurs when demand changes greatly for a small change in price
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10-23 Copyright © 2012 Pearson Education, Inc.
Publishing as Prentice Hall
Other Internal and External
Consideration Affecting Price Decisions
Economic conditions
Reseller’s response to price
Government
Social concerns